Foreign Investors to Sell US Dollar Assets, Markets Will Go ‘Haywire’

What was interesting last week was the continued decline of the US dollar. On Friday, it sank again…as gold shot up. It is impossible to predict what direction the buck will go this week; but if it continues to go down, the results could be unpleasant.

As we keep saying, we can’t predict the future…but it seems to us that investors greatly underestimate the risk in this market.

The Dow fell heavily on Friday. It’s near record levels – in every sense. If you’re looking for bargains, you will have trouble finding them. Everything is expensive.

We remind readers that the way to make money is to buy low and sell high. Doing it the other way around doesn’t work. Of course, you can also buy high and try to sell higher. But the higher you buy, the more downside risk you take on.

Our advice: Stick to the simple formula. Buy stocks when they are bargains. If they’re not bargains, don’t buy them.

And here’s another reason not to buy stocks: The dollar is falling. So far this year, investors have lost about 4.5% in dollar-based assets, compared to the euro. That effectively wipes out an entire year’s worth of earnings for Treasury bond investors, for example. The typical American barely notices; but the overseas speculator feels every slight drop in the dollar like a bee sting. And the risk to the world financial bubble is that he might go into shock.

Of course, a sudden rush out of the greenback has been a danger for years. Since it hasn’t happened yet, speculators believe it will never happen. Still, some are starting to wonder…

“Traders ask how low dollar can go,” is the headline of an article on the subject in today’s Financial Times. Already at US$1.38 against the euro…the paper cites a guess that it will go to US$1.40 soon. We remember, we predicted that it would go to US$1.50. Unfortunately, we made that prediction at least two years too early.

“At some point, the fall in the dollar will translate into foreign investors no longer buying US assets and selling their existing holdings,” said an expert who was willing to talk to the FT.

The United States has a huge annual current account deficit. Foreign investors cover it each year – buying US treasuries and other American assets. Spectators – we among them – have been amazed at how much money they were willing to put into dollars. But there’s a limit to everything…and it’s not hard to imagine a change in attitude.

One thing is connected to another, of course. The whole Crack-Up Boom owes its existence to the willingness of complete strangers to finance America’s spending habits. Now, the crack-up in subprime lending is reminding them that every asset with a dollar sign on it is not necessarily as child-safe or foolproof as it looks. And pity the poor speculator who borrowed yen, traded for dollars, and bought into Bear Stearns’ Leveraged Credit CDO fund. He’s been wiped several times over. Not only has his hedge fund account gone to zero…the yen has gone up too, giving him additional losses.

All over the Bubble Planet, people have made bets based on delicate guesses…about currencies…the Dow…interest rates…and credit quality. All it takes is one thing to go haywire…and pretty soon they’re all going haywire.

Whether this week they go further haywire or not…we’ll just have to wait to find out.

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

the value of the US$ is neither here nor there. The crack up boom has no bearing on the value of national currencies – global leverage is more closely related to the value of the US$. but the amount of leverage extended to the really big traders driving markets remains undefined. it can’t be measured, so the direction of currencies can’t be predicted.

the crack up boom will be the result of lax oversight – money supply is secondary.

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9 years 4 months ago

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